The 1031 exchange is found in Section 1.1031 of the Internal Revenue Code. The 1031 exchange allows taxpayers to defer the federal and state capital gains tax when exchanging property held in the productive use of a trade, business or investment. Property can be either real or personal property including collectibles or precious metals such as gold and silver. In a precious metals exchange there are many rules to follow, so it is best to either research the requirements or contact a qualified intermediary who accommodates gold and silver 1031 exchanges to discuss your specifics.
Three reasons to effect a 1031 exchange when selling gold and silver include:
- Capital gains tax
- Location
- Utilization
Capital Gains Tax
The federal capital gain tax rate for collectibles is 28 percent plus the state capital gains tax in addition to the 3.8 percent Medicare surtax for individuals and marrieds with modified adjusted gross incomes greater than $200,000 and $250,000 respectively. There may be also a municipality capital gains tax, such as 3.648 percent for New York City or 10 percent for Yonkers, so to be sure check with your CPA. Add these taxes up and the tax due on the sale of gold and silver can approach 50 percent. Federal, state and municipal capital gain tax rates requires the smart taxpayer to consider a 1031 exchange.
Location
Often gold or silver is held in a depository outside the United States. Taxpayers may want the gold or silver to be held within a United States depository. Per the 1031 code, property held within the United States is considered like-kind with property held stateside while property held outside the United States is like-kind to property held internationally. Taxpayers wishing to change locations can do so but should not exchange the metals until at least one year and a day following the relocation to satisfy the 1031 pre dominant use requirement. The identical pre dominant use rule applies to exchange gold or silver held abroad.
Utilization
Holding gold or silver in 1,000 ounce bars may offer investors the lowest markups over spot prices, but the approximate 70 pound silver bar or 62.5 pound gold bar is not easily used as currency to purchase goods and services. Taxpayers may want to convert bars or the different forms to bullion-type coins, such as one ounce United States Mint Silver American Eagle coins. The 1031 exchange can defer the capital gains tax until the time the replacement property is sold. Should your CPA suggest this is not possible, please contact me for a referral to a tax attorney who can provide an opinion letter supporting the precious metal exchange.
1031 Exchange Precious Metal Rules
In a 1031 exchange, gold must be exchanged for gold while silver must be exchange for silver. Gold is not considered like-kind to silver given gold is held primarily for investment while silver is held for use as an industrial commodity. What makes the metal different from numismatic coins is the bullion content.
- Per Revenue Ruling 79-143, 1979-1 C.B. 264, bullion coins are not like-kind to numismatic coins.
The value of a numismatic coin is based upon metal content, age, number minted, history, condition, art and aesthetics. Both gold or bullion-type coins and numismatic gold coins contain gold. The bullion-type coin value is valued as an investment in gold while the numismatic is valued on another set of criteria; consequently, the character and nature of the two are not considered like-kind per the 1031 exchange requirement.
Dealers of precious metals may be eligible for precious metal 1031 exchanges despite the nature of their business. Inventory as a general rule is not eligible for 1031 consideration. Should the dealer hold the gold or silver differently from their inventory held for sale; rather, with facts supporting their intent to hold for investment, then they are eligible for 1031 consideration.
View these additional articles:
- Avoiding the Tax Consequences of Selling Gold and Silver
- 1031 Exchange Gold and Silver Bullion Insights
- 1031 Exchange: Gold and Silver Exchange-Traded Funds (ETFs)
- All That Glitters Is Not Like-Kind: Collectible Coins and Precious Metals
Learn the qualifying questions asked by the most experienced Exchangors when vetting Qualified Intermediaries by clicking for the free file below.
